Nonprofit Finance: It’s Not All About the 990

Board Member and LASVP Partner Amy Johnson is leading the Partner Education Team. Amy is creating opportunities for us to learn more about the nonprofit field and how we can be more strategic in our giving. This is her re-cap of our dynamic session on nonprofit finance.

Hello Fellow LASVP Partners,

SVP Partner Donella Wilson and a guest at the Nonprofit Finance Session

I wanted to provide an update on the wonderful Partner education session conducted a few weeks ago and share some feedback and pictures. It was a fascinating introduction to the nonprofit financial landscape. The session was led by David Greco, Vice President of the Western Region for the Nonprofit Finance Fund (NFF) and our very own SVP Partner, Donella Wilson, Partner at Green Hasson Janks.

David’s presentation was very insightful, leading to a robust discussion. A key takeaway for many was how much critical information can be gleaned from the balance sheet when analyzing nonprofit financials. One attendee said, “Having both attended and conducted hundreds of sessions, this was one of the best I have experienced.” We want to send another big thank you to David and Donella for sharing their expertise with us!

What we learned:

Balance Sheet Indicators

Statement of Activities Indicators (i.e. Income Statement)

How to Read 990s

How to better understand Cash Management in the Nonprofit Industry

A recent blog post (Top Indicators of Nonprofit Financial Health) from NFF’s Peter Kramer summarizes NFF’s key messages and the concepts we learned from their years of experience lending to and advising nonprofits. Additionally, NFF and Guidestar have developed a data platform called Financial SCAN, which can help you compare and organization’s financial trends and performance through user-friendly dashboards and graphs. You can also use the tool to see how one organization’s financial metrics and ratios stack up against its peers. Kramer indicates that “Not all financial indicators are created equal” and offers a short list of variables to consider.

Income Statement Indicators

Revenue reliability. Rather than overly focusing on the ratio of earned to contributed revenue, we suggest evaluating revenue reliability—an organization’s track record of bringing in recurring dollars, on an unrestricted operating basis, year after year. Reliable revenue doesn’t always come from the same sources providing the same amounts of money. It does, however, suggest an ability to predict a level of income with a fair amount of certainty, based on historical performance and an understanding of market dynamics.

Consistent surpluses. A healthy business model is one characterized by reliable revenue that covers operating expenses and contributes to surpluses—all in the service of mission. Nonprofit is a tax status, not a way of operating: Positive operating results (unrestricted revenue consistently exceeding expenses) are an indicator of strong financial management. Aiming for break-even results doesn’t allow for the breathing room necessary for when things don’t go according to plan. Nonetheless, since 2008, when NFF began measuring the percentage of nonprofits reporting a surplus for our annual State of the Sector Survey, this measure has never surpassed 40%.

Full cost coverage. Nonprofit leaders are encouraged to set revenue targets high enough to cover not just their direct and indirect operating expenses but also the full costs of doing business. Though these additional costs aren’t reflected in the income statement, surpluses can provide the additional dollars needed to address these demands over time. These “hidden costs” such as depreciation on fixed assets and reduction in debt principal reside on the balance sheet and must also be covered by surpluses. Ideally, surpluses should also contribute to savings, such as for a future rainy day or a strategic opportunity. Though covering the full costs of doing business every year is aspirational for most organizations, doing so ensures longer-term sustainability and vibrancy.

Balance Sheet Indicators

Ability to manage debt. Debt is a critical financial tool that can help organizations manage the ebbs and flows of cash for operations, facility purchases and upgrades, and more. But as liabilities bump up against an organization’s ability to pay off those obligations, they can become a real problem. Measuring an organization’s liabilities as a percent of total assets can show how much an organization owes relative to what it owns. As this percentage creeps up near the 50% mark, it can call into question the organization’s ability to manage debt, which could jeopardize the delivery of programs and services.

Ability to steward facilities. If an organization owns property and equipment, it has a responsibility to maintain and replace these assets over time. We look for reserves dedicated by the board of directors to facility improvements and replacements. Absent formal reserves, are there appropriate levels of liquidity to respond to issues such as replacing the hot water heater or complying with ADA regulations? Additionally, accumulated depreciation can be a helpful accounting proxy for evaluating the remaining “usable” life of these fixed assets, but keep in mind that the accounting value of an asset doesn’t reflect its market value. An engineer can help identify the true future costs of fixed asset repairs and replacements.

Appropriate liquidity. There are a number of ways to measure liquidity, the resources available to absorb risk and respond to new opportunities. NFF often measures liquidity in terms of the months of expenses that can be covered with available unrestricted cash (or access to it). This year’s State of the Sector Survey results indicated that 56% of respondents expected to have three months of cash or fewer in 2013. As a general guideline, fewer than three months of cash is often perilously tight for nonprofits, though the “right” amount of liquidity depends on several elements, including an organization’s strategic priorities, funding volatility, facility needs, and the general economic environment.

It was great to mix and mingle with so many people who want to make the most of their giving and volunteering. We hope to see all of you at the next event and will continue to try to create sessions that are engaging, fun, and educational.